Thursday, 24 May 2007

How rich should a manager be- the "Pirate Memory Game" problem!

Apologies to anyone not a "Little Britain" fan- for the rest the title of this post can remain enigmatic!
Investors will often look for a new manager for their enterprises who has a clear track record of a rip-roaring success, preferably two, in closely aligned businesses. Such an individual brings experience, contacts and potentially some personal investment- all undoubted positives.
However, I was speaking to an early-stage investor who's looking for new management to join a portfolio company- he very eloquently put the case that he was looking for someone who'd been successful, but who had only made a little money from running another similar company. The argument goes that anyone who's made a great deal of cash before is never going to care enough about making a success out of the new company. He cited the example of a major radio station which had been a big hit and had been sold for a large 8 digit sum, but where the CEO had made a modest 6 digit sum- enough to be a little more comfortable than most, but still to be "on a mission" to prove to themselves they could get rich. This was held up as perhaps an ideal model.
I have some , sympathy with this view, even if it makes the search for new management even more challenging! I've been lucky enough to have met hundreds of entrepreneurs who've had every level of success from small trade-sale to major IPO- studying them has been fascinating.  During this time I could certainly see examples of people who had made lots of money and, perhaps as a consequence, were rather comfortable. They can have a tendency to have mainly used the experience of being successful to learn how brilliant their opinions are on any business-related topic. I can certainly think of examples who seemed to me to be rather quick to reach extremely strongly argued opinions on minimal data.
As primarily a seed/first round investor, it's really important to me how follow-on investors view management in general and specifically, but I think for now I'll keep trying to look beyond the "proxy markers" to understand the individual themselves: they/we may just have to make do with the only Pirate Memory Game in the shop!

Thursday, 17 May 2007

A Magic Way to Enterprise Software Success ;-)

Joe McKendrick has an interesting piece about the cultural issues of implementing SOA in an enterprise- this got me thinking about successful IT projects more generally: he's based much of his commentary on a challenging article "Finding the Real Barrier to SOA Adoption" by Ronald Schmelzer.
My observation is that everyone seems to accept that enterprise implementations fail between 30% and 80% of the time. However, we've made around 20 investments in very early stage software companies and ALL OF THEM delivered the product both on time and on budget.
I don't think this is too hard to understand: these companies have some common characteristics:

  • They're small teams of very very good programmers (you can hire them more easily/cheaply in the North of England!)
  • They live very close to the customers
  • Their motivation is very highly geared towards their customers' satisfaction
  • They have brilliantly supportive investors ;-)
It seems then especially ironic that large enterprises are very hesitant to use very small software vendors as they view them as having higher risk- my answer to that would be risk of "what". A vendor that's still around for a project that failed is perhaps no more useful than having a successful implementation where the vendor has gone out of business!
Finally, what I think large companies often neglect is that the "failure risk" of that small innovative vendor is strongly linked to the small vendors ability to sign up the large enterprise (on good payment terms!)

Wednesday, 2 May 2007

"Applications Engineering" or Platform

Early stage investors like backing "platform" technologies, but everyone knows these are rather rare beasts. On the other hand customers buy solutions to their problems- especially if they're looking at using a cutting edge technology. This can put an early stage technology company in a bind that's particularly frustrating for company and potential investors alike.
Without naming-names, obviously, I've seen quite a few companies who are falling into this gap. A particular example I saw a few years ago, but with huge parallels to a much more recent applicant for funding, was looking at a sensor technology. This company had a technology with a particular set of USPs which took it well beyond the existing sensors. It also had some early customers keen to use their technology. So, the company believed, we should've been keen to pursue the investment. However, the problem was that the early customers had applications which didn't really use the USPs of the sensor. Indeed the main reason that the customers were so enthusiastic was that their inventor was willing to explore doing a relatively small volume sensor with a specification a little different from the off-the-shelf sensors from the big manufacturers. In essence then, although pitching as a "platform" they were addressing early customers who were buying because of the "application engineering" they could obtain from the hungry start-up.
Still, revenue is a good thing, so surely this "application engineering" model should've made the proposition more investable not less? Well, for us at least, it wasn't that simple. The company was tooling up in terms of management, team and core-competencies to match the "applications engineering" model, and that made us at least a little nervous that they'd be able to point the company towards the platform opportunity in a reasonable timescale.
I don't think there's an easy solution to this conundrum- at least I've not come across it yet- but I still believe it is a problem worth recognising when it makes itself known.